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Apple Assurance

Apple is categorized as a vendor of consumer electronics. More specifically, a member of the “Electronic Equipment” industry in the “Consumer Goods” sector. If indeed this is what it’s thought to be selling, there is a problem because it isn’t  what its customers are buying.

Apple’s customers buy a mix of hardware, software and services under a brand that assures a certain quality of experience. This bundling and integration of otherwise disparate things is why the brand is such a success.

This anomaly between what Apple is thought to sell and what buyers actually buy can leave the casual observer confused. As a result the company’s categorization as vendor of hardware deeply discounts its shares. It is, in other words a less valuable business. This is because a seller of consumer electronics does not benefit from “system valuation” since there is minimal loyalty to the product after the sale.

The consumer electronics vendor has no network to leverage, no ecosystem adding value after the sale, no platform and works through multiple levels of distribution to reach the customer. In contrast, a system vendor can expect benefits from network effects, ecosystems, and a coveted relationship with the end user.

The result is that the valuation of a consumer electronics vendor is based on the momentum of individual products. Apple has always been valued this way. Each hit product is considered to be a stroke of luck/genius and the chances of recurring are discounted to about zero. Regardless of the fact that it has a track record of “home runs”, Apple’s hit rate is not considered sustainable.[1]. Certainly Apple is not valued as being able to generate reliably recurring revenues.

But what if we were to value Apple on the basis of what people are buying rather than what it’s thought to be selling?

The model is simple enough: determine the number of users, estimate the lifespan of the products, and figure out the services attached to the products; then, given the price, obtain a price per product per day. You then can get a recurring revenue figure.

I did just that and the results are in the following table:

Screen Shot 2015-09-15 at 5.13.27 AM

The first column is the product, the second is the Average Selling Price (ASP), the third is the expected lifespan of the product, and the fourth column is a calculation of the end user’s “spending per year” on the product.

The fifth column is an estimate of the revenues from Apple’s Services and “Other” groups from post-sale revenues attached to the product. This Services revenue includes AppleCare, iCloud, Music, App Store, other stores, Beats, accessories, iAd, and Made for i (MFI) licensing. It also includes Google traffic acquisition revenues and other licensing.

The sixth column is an estimate of the consumer “spend per day” on Apple’s product lines taking into consideration Services.

The seventh column is an estimate of the number of active devices in the hands of users. Note that these are expected to change over time.

The eighth column is a calculation of Services/Other income on a per-product allocation. This is a test of the Services+Other estimate and is meant to sum to nearly what Apple currently reports as Services+Other revenues.

The ninth column is a test of overall revenues on a per-product allocation. This should add up to total revenues (estimated for next year.)[2]

The bottom line is the following graph which shows the revenue per device per day inclusive of Services and Other income (The sixth column).

Screen Shot 2015-09-15 at 5.22.23 AM

This is, in my opinion, a reasonable way to approach valuation of Apple as a business. It’s also a way to inspect its strategy.

As a valuation we can easily obtain the net present value. The model gives us sales and by estimating a net margin (which is remarkably steady around 22%) we can get the free cash flow.Iterate into perpetuity with a discount rate, and you can get the net present value of the company. With a modest growth rate leading to a billion active devices in use and a normalized revenue per device of $0.92 you can easily see cash flows equivalent to $1 trillion in present value.

But much more interesting than this value is the notion that Apple is in business to deliver a product/service mix to loyal customers and to preserve their loyalty through constant improvement and innovation. You can see strategic intent in increasing the attach rate of services per device. You can see a strategic intent in building loyalty and the right customer base which is likely to be loyal. You can see strategic intent in the iteration of the product in a way that extends loyalty and expands the solid base but also increases the $/day rate. This analysis correctly informs almost all decisions the company makes.

What we just saw in the launch of a new Apple TV and a new iPad is consistent with this strategy. Apple TV will have a higher service attach rate with apps while keeping pricing well below consoles thus expanding the user base. The iPad is increasing in price and getting more accessories. The developers are encouraged to build richer and more valuable apps that are uniquely enabled by the new device.

The fact that Apple has just launched a subscription service for the iPhone  makes what was clearly their strategy all along plain to see however it has been a strategy in effect for decades.

It isn’t a difficult idea to embrace. It always surprises me that it’s not more commonly held. The reason may be that Apple is mis-categorized.

Or perhaps the entire categorization of industries and sectors is obsolete in what is a new post-industrial age. Some have figured this out already. Others will take longer.

 

Notes:
  1. The P/E ratio is the primary indicator in this analysis []
  2. Naturally, the active devices estimate is the most sensitive but it should be tweaked to create a reasonable forecast for next year. []
  • David Gonzales

    What’s the apple car line item look like?
    $50k/8yr?

  • Eyc

    Interesting…so living the “Apple Life” costs less than $4 per day – that’s less than what people spend per day on a Starbucks coffee. The cost/benefit comparison of Apple products vs. a cup of Starbucks coffee is shocking (to a non-coffee drinker).

    • Abdel Ibrahim

      Even if you are a coffee drinker, you can choose to make as good if not better at home for less than 50 cents per day. Truth is, every Apple product made is provides far more value per day than a cup of coffee. I bet most of us would pay $3 a day for an iPhone.

      • pk_de_cville

        “I bet most of us would pay $3 a day for an iPhone.”

        Yes. In the US, that’s about $1/da to Apple and $2/da to the carrier. In other parts of the world, it’s $1/da to the carrier and so we get $2/day for an iPhone elsewhere.

      • rattyuk

        If you throw the watch away after a year, that’s also around a $1 day or thereabouts. I can live with that.

  • Luis Alejandro Masanti

    Great analysis. Thanks. As usual, Apple is truly secretive!

    There is a lateral point that I would like you to analyze.
    With the phone subscription, Apple will ‘regain’ a lot of phones that —otherwise— would go to the ‘grey market.’ Now, they will ‘gain control’ a large part of that market.
    I think that this is a very important part of the subscription reason d’etre.

    On the other hand, somewhere we all read that somebody said that Steve initial idea was to get rid of the telcos… This is the beginning of their end! Not to mention all the SIMs ideas already poured.
    And I’m not speaking of a MVNO.

  • Hubert

    This is the best one yet explaining the unique Apple business model and strategy, thank you, Horace!

  • Bernard Desarnauts

    Horace, this is stupendously simple and great way to look at it. One more tidbit you could look like is time spent per day with an apple device… that’s probably even more staggering.

    • http://www.asymco.com Horace Dediu

      Good point. It may turn out that the Apple Watch is the best value on earth.

      • Bernard Desarnauts

        Our data last week says a) 95% wear their watch most of the day on most days while it also shows 30% less iPhone pick up for Watch wearers…

      • jwan584

        This may be true but if I probably spend hours *looking* at my phone each day and only a few minutes at most *looking* at my watch.

      • fstein

        Still ‘early days’ re Watch. Key advantage is expansion of iOS, same as with Apple TV. Note Samsung already left Android with Tizen for Gear.
        All the above strengthen iOS vs. all other OSes. At the risk of exaggeration, iOS becomes the OS for your life, that happens to run on many devices that you own.

      • Bernard Desarnauts

        Sorry that’s not the point I was trying to make. Aka it is not about time on the Watch per se, but the corrolary is that we also show significant less minutes/day on iPhone. will publish in a month or so after more data collection

  • gary kung

    Horace, how do you anticipate Apple’s working out for incremental service costs for services such as Music at $10/month and Apple TV Bundle at $40/month? DO they belong together as portion of Apple hardware or standalone?

  • melci

    Great perspective. The Ecosystem force-multiplier continues to be ignored by far too many “device sales market share is all that matters” analysts.

    Horace, do you know of any studies that have managed to track the total lifespan over multiple owners of Apple devices?

    2 years for an iPhone and 3 years for an iPad just do not sit at all right with me considering the hand-me-down value and vibrant resale market for Apple kit, the second hand grey market in China and other places and the large percentage of users still using their iPad 1’s and iPad 2’s that I see around me.

    Apple’s on-going support for their old devices such as the now 4.5 year old iPad 2 which still runs the latest iOS 8 tells me there is a very significant number of these old devices still in use (mine included). Heck, we have three of the 5.5 year old iPad 1’s still in use by kids in our household.

    • iObserver

      Very good point. Don’t forget the longevity of macs and their resale. The iPad numbers stalking a bit may be a victim of its own secondary market success. What really matters is that each year even with the slow-down there are more and more iPad users whether new or used. The ecosystem grows.

    • Christopher Dungeon

      I don’t think I’ve ever seen an iPad 1 in the wild… Also, you’re looking at it wrong. It’s not about how far or long a device goes down the used market, it’s about how often user #1 buys a new device.

      • melci

        Have you seen families with younger kids? In that demographic iPad 1’s have a very long tail. iPad 2’s however are certainly far more viable as they’ll even run iOS 9 (though my iPad 2 is definitely getting slow in some apps).

        Also, the initial purchase of a device is only relevant for the revenue (and market share) noted by it’s sale. Horace’s point in this article highlights the on-going daily ecosystem revenue that comes from old second-hand as well as new devices.

      • SubstrateUndertow

        Still using an iPad one! But will upgrade this Christmas.

        I wonder how many others who have experienced the easy to stretch iPad-1 life cycle are now ready to cycle?

  • http://drewlustro.com Roger Sterling

    Businesses that have very low employee turnover rave about the benefits to culture, efficiency, and the bottom-line. Apple essentially has this relationship with customers.

  • Umair Itrat

    How did you get the 1.5 year lifespan for the Watch? It’d be longer, no?

    • HenkPoley

      It’s probably that as an early adopter with these ‘hip’ first gen products you are sort of expected to buy the latest model each year. Some don’t, but buy the second year new model. (1 y + 2 y) / 2 people = ballpark 1.5 y per person.

    • http://sumocat.blogspot.com Sumocat

      That also struck me as odd. I expect every other smartwatch vendor to go through at least two iterations before the second Apple Watch is released. However, the numbers imply a tech-minded mentality and are based on usage by an owner, not the lifespan of the product itself. For example, iPhones currently get software updates for five years, but those who hold on to them for that long are offset by those who update every year. Still, that doesn’t explain why a product that probably won’t see a refresh for three years has a 1.5 year lifespan.

    • berult

      JTBD determines the refresh rate.

      An always-worn, intimate object, thus always exposed to constant perusal by everyone…the user foremost, needs be given a shot of alloy chutzpah for it to perform, right up to its usefulness’ end…some three years hence, its co-prime aesthetic duty.

      After-market takes care of derelict egos, …and tampered anxieties. berult.

  • John Willis

    I’m wondering where you get the attached services? iCloud and related services are free, and we know the iTunes revenue per customer – those revenue per customer (to apple) seem really high. the Apple branded app prices and OS updates for the Macs have effectively dropped to zero for most users. Anecdotally (being a Mac guy for 20 years),they seem not to match up with most users – are they really that high? That would be a pretty big revelation in themselves.

    • http://www.asymco.com Horace Dediu

      From the Income Statement. See also earlier posts on Services titled “(Much) Bigger Than Hollywood”

      • frankcapra03

        How would this look now, considering you used 780M active devices in your model and yet recently Apple disclosed they have 1B active devices in use today.

      • melci

        Indeed,

        Apple has only sold 78 million Macs in the last 4 years and 12 million Apple Watches and around 20 million AppleTVs in that time.

        Even if we assume that ALL of those other devices are still active after 4 years, we are still looking at around 900 million of those 1 Billion active Apple devices being iOS devices.

        That is an extraordinary 60% the size of Google’s 1.4 Billion active Android devices, far higher than you might expect considering Apple’s 15% iPhone unit sales market share.

        Also consider Apple has only sold 242m iPads sold in the last 4 years so that takes us down to 658 iPhones and iPod touches.

        Apple has probably sold about 30 million iPod touches in the last 4 years (assuming the same lifespan as the iPad) so that brings us down to an active installed base of 628 million active iPhones, not 450M.

        628 Million active iPhones implies an active lifespan of 3.25 years.

        What this means is we need to adjust our estimations of the active lifespans of Apple devices – both the iPhone and no doubt the iPad and Mac as well.

      • KirkBurgess

        That 3.25 iPhone active lifespan also includes all 2nd hand (and 3rd hand) users of each device.

    • tiersystem

      iCloud is not free. It has a free tier, and a tier that costs $240 a year, amongst others.

      • John Willis

        I’m aware of the tiers, but as a person who used to pay for .mac and the paid upgrades for the OS, for iWork, and for Aperture – all of which are basically free (or discontinued) now – most of the people I know probably pay Apple much less money for Macs and software than they used to – even as recent as 5 years ago. The Apps on the app stores from Apple don’t advance in version anymore – if they were bought 2 computers ago, they are still updated and installed for free on new phones and macs. I wonder how much the numbers are pushed up by a small percent of heavier users buying iCloud and the remaining Pro apps that still require paid updates. Perhaps keeping the iCloud free tier at 5GB of space drives services revenue more than I realized.

  • gfoux

    Wouldn’t it be interesting if the new monthly purchase method for the iPhone could also be offered for Apple devices (watch, computers, iPads)? and bundle with some services? That’s an Apple Monthly Tax that I would love to pay… say $100 to $200 monthly to have the latest Apple products and services.

  • GlennC777

    One dollar per day is a reasonable order-of-magnitude rule of thumb, but it assumes relatively frequent upgrade cycles and zero residual value. Most Apple devices have a real cost to their users well under that.

    • Christopher Dungeon

      Not sure what the point of your statement is. Real money at ASP of ~$650 goes into Apple’s pockets. Regardless of whether you buy your phone on a monthly plan from a carrier, that carrier transfers real dollars to Apple. Now, something different will happen with Apple’s upgrade plan but it’s actually better for Apple. Why? Because you are paying Apple that same ASP of ~$650 +$129 for AppleCare+. They’ll make that $129 off of you even if you trade your iPhone in after one year, and then they will sell your used iPhone when you trade it in. Glorious business plan and hats off to them.

  • Walt French

    This is a wonderful way to view Apple, so succinct and relevant. Clearly identifying the strategic direction is genius.

    But from a valuation perspective there is a huge assumption embedded that deserves to be called out: the growth rate of users. I get that Apple loyalty is pretty much unmatched, and the growth rate discussed seems conservative. But it seems much more likely that Apple’s near-term growth will be higher, but in the future there is a risk of some dramatic disruption.

    Google Wear becomes valuable due to their massive databases? US carriers agreeing on a post-app environment where everything lives in the carrier networks? My imagination fails, and yet, unforeseen disruptions are what this blog is all about.

    Again, I’m amazed that despite Horace’s long-standing “dollar a day” model of Apple, others haven’t chosen to evaluate it as a virtual service, even its tech neighbors have those explicit revenue models, and the always-on-death’s-doorstep model has performed so poorly.

    But neither do I think it right to simply discount the“cash flows [as] equivalent to $1 trillion.” Some day, the world’s population will be unable to incorporate all of Apple’s innovations into its network, or some government will insist on a “more level playing field” and followers will have the time and opportunity to compete more effectively on the modules that Apple so neatly ties up today.

    (Pessimistic? I think not. There are plenty of fields where Apple can apply its discipline and imagination. Just that a perpetuity seems unlikely.)

    • berult

      What you aptly describe, revert to the undercurrent WS rationale that prices the uncertainty principle into a cornerstone of Apple’s valuation. Fair enough.

      But in this spirit of fairness, has either the Renaissance or the Industrial Revolution, or both, come to pass a long time ago…? Or have they both been totally assimilated into a functional strand of Homo sapiens sapiens DNA…?

      Is Apple a product of its time, …or is it a timely product…? Is it an institution amongst many, albeit a very productive one, or is it an event that permanently redefines what a functional institution, hence, shall, by a quantum of necessity, be…?

      What is Apple? Or rather, whence is Apple? Or rather why is Apple? Or rather, is Apple ‘We’, or is Apple ‘thee’…? If one refines Apple down to an event, it shall then logically endure as part of our collective DNA. If one distills Apple to a dice played by a capricious God on an off-day, then it might, but then it just might not, see the end of the day…

      Thoroughly grok the iPhone event, in the physics sense of the word, and you stand a chance to instinctively add a time dimension to the Apple spatial overlay. Apple plays the long, Jobsian, ‘DNA’ game, with the iPhone providing its basic alphabet.

  • freediverx

    Would love to support this site, but gotta say I’m so happy to finally block the obnoxious Taboola ads.

    • SubstrateUndertow

      The value vs clutter on this site has more than earned the right to be Whitelisted on my ad blocker !!!!

  • Christopher Dungeon

    If anyone from Apple is reading this, you really need to focus on the following to shore up this new iPhone Upgrade Plan: When it comes time for the user to trade-in their iPhone after 1 year, you need to ship them the new device instead of having them trade-in via retail. This allows the user to get all warm and fuzzy when it comes times to transferring their personal data from their old iPhone to the new one. Give them a return box to send their old iPhone back within a certain timeframe. I know some might not always ship on time or some devices may not be in ideal condition, but for the majority this will be the perfect plan for you going forward. It’s easiest for the customer and this added reassurance during data transfer is key. The risk is worth taking in order to make a phenomenal upgrade program.

    • Kizedek

      Except there is no data transfer between iPhones: backup to computer or iCloud; download purchased apps from iTunes; sync mail/calendar/contacts/etc. with iCloud account.

  • melci

    Horace, since Apple’s revelation of 1 Billion active devices, how does this sound for a breakdown of the numbers of Apple’s active devices:

    Apple reports that they have 1 Billion active devices (iPhone, iPad, Mac, iPod touch, Apple TV, and Apple Watch).

    If we assume a 5 year average lifespan for Macs and Apple TVs, that makes:
    97m Macs
    12m Apple Watches (estimated)
    20m Apple TVs (approx)
    = 129m non-iOS devices

    That leaves 871m active iOS devices.
    So assuming a 4 year life span for iPads and iPod touches:

    242m iPads
    20m iPod touches (approx)

    So the number of active iPhones
    = 871 – 242 – 20
    = 609 million active iPhones

    This gives an average lifespan of between 3 and 3.25 years for the iPhone.

  • SlowAppreciation

    Doesn’t this double count the Apple Watch and AppleTV since they appear in the “Other” section of Apple’s 10k?